Bank of England December 2021 Preview

Prior Decision

In the last monetary policy decision of November 4 the Bank of England (BoE) had decided to keep rates steady at 0.1%, although the decision was not unanimous. MPC members Mr Ramdsen and Mr Saunders had broken rank, favoring an increase in rates. [1].

The policy statement however, acknowledged that "…it would be necessary over coming months to increase Bank Rate in order to return CPI inflation sustainably to the 2% target".

The UK central bank runs an £875 billion government bond buying program (plus £20 billion of corporate ones) to help the economy recover from the pandemic shock. This was left unchanged as well, with three officials voting for a reduction - Mr Saunders being one of them.

The bank also released its quarterly Monetary Policy Report, where it projected inflation to rise further, to around 5% in the spring next year and fall after that. [2].

UK's Consumer Price Index (CPI) had surged to 4.2% y/y in October (from 3.1% prior), which is way above the bank's 2% target, putting pressure for monetary tightening. The next CPI figures are due on Wednesday December 15, a day ahead of the BoE's policy decision.

Communication Problems

November's decision to maintain rates, wrong-footed markets, which were increasingly expecting a hike, causing turmoil. These heightened expectations were in large part fueled by central bank officials themselves, most importantly by the governor.

In mid-October, Mr Bailey had signaled that the BoE would have to act in the face of rising inflation, while speaking at the G30 36th Annual International Banking Seminar. [3]

Omicron Headwinds

The US Federal Reserve also announces its policy decision this week, having adopted increasingly hawkish rhetoric, with Mr Powell pointing towards a faster QE tapering path - defying the recent rise of the Omicron variant.

The Bank of England on the other hand, may not have the luxury of a relaxed approach towards the new variant, as the UK government announced stricter Covid rules to control the spread of the pandemic, last Wednesday [4]. More to it, the Covid Alert level was bumped to 4 (from 3) on Sunday and PM Johnson warned of "a tidal wave of Omicron coming" [5].

Upcoming Decision

The Bank of England announces its last monetary policy decision of the year on Thursday December 16, following last month's communications blunder, with markets and analysts approaching the decision with low expectations.

The bank is not forecasted to increase rates, nor change the Quantitative Easing program (QE), while CME BoE Watch Tool implied a 100% probability of rates staying at 0.1% [6] at the time of writing.

BoE commentary is once again the main driver behind those expectations, Mr Saunders in particular, who may be the "hawkiest" member of the Monetary Policy Committee (MPC) and who had voted in favor of a rate hike last month.

In a speech on December 3, he offered a rather dovish view, by noting that "In considering if and when to adjust rates, there is always a case to wait and see more data. At present, given the new Omicron Covid variant has only been detected quite recently, there could be particular advantages in waiting to see more evidence on its possible effects on public health outcomes and hence on the economy" [7].

Apart from the decision itself on rates and QE, focus will also be on the vote counts, the policy language and the minutes of the meeting.

Such events have the potential to increase volatility, which was vividly illustrated during the last BoE decision, when the British Pound had plunged and GBP/USD had recorded its worst day of the year.

Nikos Tzabouras

Senior Market Specialist

Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.

With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.

References

1

Retrieved 14 Dec 2021 https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2021/november-2021

2

Retrieved 14 Dec 2021 https://www.bankofengland.co.uk/-/media/boe/files/monetary-policy-report/2021/november/monetary-policy-report-november-2021.pdf

3

Retrieved 14 Dec 2021 https://www.youtube.com/watch

4

Retrieved 14 Dec 2021 https://www.gov.uk/government/news/prime-minister-confirms-move-to-plan-b-in-england

5

Retrieved 14 Dec 2021 https://www.gov.uk/government/news/urgent-omicron-appeal-get-boosted-now

6

Retrieved 14 Dec 2021 https://www.cmegroup.com/trading/interest-rates/bank-of-england-watch-tool.html

7

Retrieved 23 Jun 2022 https://www.bankofengland.co.uk/speech/2021/december/michael-saunders-speech-at-a-boe-hosted-event

Disclosure

Any opinions, news, research, analyses, prices, other information, or links to third-party sites contained on this website are provided on an "as-is" basis, as general market commentary and do not constitute investment advice. The market commentary has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and it is therefore not subject to any prohibition on dealing ahead of dissemination. Although this commentary is not produced by an independent source, FXCM takes all sufficient steps to eliminate or prevent any conflicts of interests arising out of the production and dissemination of this communication. The employees of FXCM commit to acting in the clients' best interests and represent their views without misleading, deceiving, or otherwise impairing the clients' ability to make informed investment decisions. For more information about the FXCM's internal organizational and administrative arrangements for the prevention of conflicts, please refer to the Firms' Managing Conflicts Policy. Please ensure that you read and understand our Full Disclaimer and Liability provision concerning the foregoing Information, which can be accessed here.

Past Performance: Past Performance is not an indicator of future results.

${getInstrumentData.name} / ${getInstrumentData.ticker} /

Exchange: ${getInstrumentData.exchange}

${getInstrumentData.bid} ${getInstrumentData.divCcy} ${getInstrumentData.priceChange} (${getInstrumentData.percentChange}%) ${getInstrumentData.priceChange} (${getInstrumentData.percentChange}%)

${getInstrumentData.oneYearLow} 52/wk Range ${getInstrumentData.oneYearHigh}